Introduction

A U.S. trucking company is considering using debt for the first time to acquire another company. The directors of the company are divided in their opinion of the likely impact of leverage on Continental Carriers' performance. Their differences must be reconciled and a decision reached about whether to issue new debt or equity to fund the acquisition. Students are introduced to the impact of leverage on performance variables such as profits, growth, earnings per share, and stock price. A rewritten version of an earlier case.

1. As Ms. Thorp, treasurer of CCI, appraise the cash impact and EPS impact of the bond issue and of the common stock issue? Also consider the issuance of $50M of preferred stock, par value $100 and paying a $10.50 dividend and the impact on cash and EPS.
2. How should the acquisition of Midland Freight be financed, taking into account the cost comparisons and other appropriate considerations?